FDI in insurance joint ventures: Let foreign partners have majority control The foreign direct investment (FDI) limit in insurance joint ventures is slated to go up from 26% to 49%, Parliament willing. But majority ownership and tightly defined control — the right to appoint a majority of directors or to control the management or policy decisions including by virtue of their shareholding or management rights or shareholder agreements or voting rights — must stay with Indians. This could stunt some insurance ventures, at least. The industry needs lots of capital to grow, and the need is to allow foreign partners have majority control. Premiums paid by policyholders rest on the books of insurance companies, and prudential norms mandate insurers to provide for more capital as premium collections go up. A majority 51% stake will enable foreign partners to consolidate their accounts, and make it attractive for their boards to sanction higher investments in India. The FDI limit in the banking sector is 74%, though voting rights are capped at 10%. Why fear majority foreign ownership in insurance? Subsuming portfolio investments in the 49% cap is welcome, but incremental reform. It will help some insurers list on the stock exchange, and allow foreign investors to exit after selling their stakes to a portfolio investor. Indian promoters, too, have the opportunity to divest a part of their stake: FDI levels can be raised without issuing new equity, meaning existing shares can be sold to foreign investors. The larger point is that the performance of private insurers has been below potential due to the economic slowdown. A liberal FDI limit will strengthen the sector, enable insurers write more business in an underinsured country like India. Independently, the Cabinet’s decision to release money to compensate states for reduction in the central sales tax (CST), a tax on interstate sales collected and appropriated by the state where the sale originates, is welcome. Ideally, CST should be abolished with the rollout of the goods and services tax to remove barriers to seamless movement of goods across states. theinsurancesurveyor
Posted on: Sat, 13 Dec 2014 10:00:31 +0000
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